Fed recognized the threat of consistent, high inflation for the US economy but chose to stay well behind in its control of inflation. Lax Fed policy will encourage flows into higher growth and higher interest rate countries like India. RBI will now have to worry about market bubbles and high inflation.
US interest rates to stay low
During the December 2021 policy-meeting, Federal Reserve (Fed) came out with aggressive bond tapering program (USD 60 billion from January 2022), 3 rate hikes starting from March 2022 and 2 rate hikes in 2023 & 2024 respectively. Assuming each rate hike would be 0.25% notch up it would result to 1.75%-2% rates by end of 2024. This move would end Fed's pandemic ultra-loose monetary policy and pave way for tightening monetary policy.
Earlier, Fed had started its bond tapering program with USD 15 billion per month and stated inflation to be "transitory". However, outcome from December 2021 policy-meeting clearly shows inflation fears grappled policymakers and are aiming for 2.3% inflation rate in 2023 (6.8% reported in November 2021).
Equity markets surprisingly reacted positive to the hawkish tone of Fed, Wallstreet indices bounced back from opening losses and closed on positive note. 10-year UST closed on flat note. Sensex & Nifty opened gap up by 0.5% and INR marginally up. Globally, supply & demand imbalances have caused several issues including, inventory pile up, higher raw material costs and logistics issues for trade. As a result of this, there has been a structural shift of supply chain across the globe leading to higher capex by corporates (low interest rates is another catalyst).
10-year G-sec yield is currently trading close to pandemic highs and is unlikely to move up from here too much given Fed guidance. RBI sounded out higher inflation, global central banks removing accommodation, healthier growth outlook but kept its own policy easy with ultra-low rates and high liquidity during the latest policy-meeting. This forces money out of safe low yielding assets to higher risk and higher return assets. Click here to read our complete analysis on December 2021 RBI policy-meeting.
Fed December 2021 policy-meeting highlights:
• USD 60 billion bond purchase from January 2022
• Expects 3 rate hikes in 2022, starting from March 2022
• 2 rate hikes each in 2023 and 2024
• Inflation levels projected at 2.6% and 2.3% in 2023 & 2024 respectively
• Raised GDP growth forecast to 4% in 2022 from 3.8%
• Lowered GDP growth forecast for 2023 to 2.2% from 2.5%